The government has long had the power to prosecute big companies for fraud for going after lucrative contracts meant for small businesses. But it rarely does.
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Workers send blood through pneumatic tubes. (Translogic Photo)

Though hundreds of millions of dollars in government contracts have been diverted to huge corporations without penalty, prosecutions are rare.

A Newswire21 investigation found that despite the complaints of small business owners and the government's own watchdog reports, tens of millions of dollars in contracts annually pad the revenues of big companies, many belonging to Fortune 500 companies.

In 2008, for example, the Government Accountability Office looked at a small sample of Interior Department contracts and found $5.7 million going to firms such as Home Depot, John Deere, Dell and Sherwin Williams.

In March, the GAO found 14 firms received $325 million in sole-source and set-aside contracts [intended for minorities, women and veterans]. The GAO reported, "most were obtained through fraudulent schemes."

A year earlier, the GAO found 19 companies improperly received $30 million in federal contracts intended for small firms in low-income neighborhoods. SBA officials said they were "reengineering" the program to make it more efficient. The GAO concluded the SBA did not have effective fraud-fighting measures.

In a separate $4 billion program intended to help disabled veterans, a 2009 GAO study found at least $100 million going to companies that weren't entitled to it due to fraud and abuse. Yet the Small Business Administration didn't examine whether there was intent to defraud the government.

"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud," the GAO report concluded.

The rules for what constitutes a small business are complex and vary from industry to industry. The size of manufacturers, for example, may be based on number of employees, while retailers have a different standard, according to Joe Swain, a Small Business Administration spokesman. That said, small businesses are often considered those that are privately run and have fewer than 500 employees.

Congress mandated 30 years ago that 23 percent of federal prime contracts go to qualified small businesses, and the SBA tracks how each government agency performs in meeting that goal.

One business owner who has complained about large firms muscling in on small business contracts is Fred Valerino Sr., chairman of Pevco International Systems Inc., a Baltimore firm that makes pneumatic distribution tubes for hospitals and  pharmacies.  

Swiss Owners
Valerino, who has 90 employees, discovered his competitor, Translogic Corp., won 147 federal contracts between 2003 and 2008. It had applied as a small business with 280 employees and $8 million in annual business, although it was a subsidiary of the major Swiss firm, Swisslog Holding AG, with 2,000 employees.

Last year, Valerino complained to the SBA.  "I got back a response that they would turn it over to the Veterans Administration," which awarded the contracts, he said. The VA told Valerino that Translogic's status was "miscoded" and removed the firm from the VA's tally of contracts awarded to small businesses.

The removal of Translogic from the VA tally worsened the agency's small business contract performance, but did nothing to help Valerino. Translogic faced no punishment or loss of existing contracts, despite its lack of qualification as a small business, Valerino said. The SBA dropped the matter.

"SBA only focused on the VA. They didn't reopen the inquiry," said Valerino.  "All the contracts were completed and executed.  I saw no evidence of corrective action, no slap on the wrist."

"We lost millions and millions of dollars in opportunities. There is no justice here," he said.

Swain claims the SBA has become more aggressive in its monitoring under the Obama Administration.  "If we find data that a company is not eligible [for contracts], and intentionally misrepresented themselves we will work with the Inspector General and the Department of Justice," he said.  He declined to comment on the Translogic case.

One Suspension
In recent years, the SBA has suspended only one firm from federal contracts over similar allegations of improperly claiming contracts intended for small businesses. GTSI, a technology systems integrator in Herndon, Va., was suspended Oct. 1. But the SBA didn't move quickly.

GTSI acknowledged in Securities and Exchange Commission documents from 1969 that, "As a result of the acquisition of the BTG Division in Feb. 1998, GTSI no longer qualifies as a small business for contract awards after February 1998."  Yet the company remains among the top 50 governor contractors, with nearly $1.2 billion in federal small business contracts between fiscal years 2004 and 2010, according to the American Small Business League (ASBL).

Less than three weeks after the Oct. 1 suspension the SBA lifted the order after striking a deal with the contractor.  "Now that the SBA has lifted the suspension we are looking forward to getting back to helping our customers meet their mission," the company said in a statement. It declined Newswire21's request for further comment.

"The fact that SBA waited almost 12 years to suspend GTSI after they admitted that they were not a small business, is proof they are assisting these large firms in high-jacking small business contracts," said ASBL founder Lloyd Chapman.

Chapman said his group reviewed the top 100 recipients of federal small business contracts for fiscal year 2009 and found 60 were large firms, which received nearly 65 percent of the total dollars the government said were awarded to small businesses. For example, he said Colt Defense, the large publicly-traded weapons company with 1,000 employees, had 166 federal contracts in 2009 for $122 million, of which $88 million were awarded as "small business" contracts.

See Part 1: Big Muscle in Small Business

https://www.asbl.com/showmedia.php?id=1796

Source: http://redwoodage.com/content/view/233426/44

When the Small Business Administration barred a Virginia technology firm from bidding for federal contracts recently, some hoped it signaled a turnaround at an agency that had a well-earned reputation for looking the other way as big corporations muscled-in on work meant for smaller companies.

(Flickr)

GTSI Corp., which had signed $1.2 billion in federal contracts between 2004 and 2010, was the first large government contractor suspended since 2008, when IBM was suspended for one week. But less than three weeks after the GTSI suspension, the SBA struck a deal with the firm and lifted the order. 

The GTSI case reflects a broader problem confronting the nation's struggling small businesses. Large corporations routinely reap billions of dollars from federal contracts intended to help mom-and-pop firms. In the last decade, a dozen federal investigations and Congressional inquiries have turned up billions of dollars annually that go to big corporations despite legal mandates that small businesses win a share of federal contract dollars.

"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud," according to one Government Accountability Office report  reviewed by Newswire21.

At the time the suspension, GTSI said the suspension was lifted after the firm agreed to "bring in an SBA-approved monitor to report to the SBA on GTSI's compliance with the agreement."  In another part of the deal, GTSI's chief executive officer and corporate attorney resigned.  "GTSI will continue to cooperate with the continuing investigations of its conduct as a subcontractor for certain small businesses," the company said in a statement. Paul Liberty, company spokesman, declined to elaborate on how the problems began or on the solution worked out with the agency.

The SBA claims it is attempting to address the concerns. "The problems were not created overnight and we have taken steps to address them," said Joe Swain, SBA spokesman in Washington. He pointed to the Small Business Dashboard launched September 15 that can help track mistakes in contract awards.  When discrepancies are found by contracting companies, Swain said, the SBA issues annual "anomaly" reports. 

"We are not afraid of the transparency on this," he said, adding that the SBA has been "much more aggressive" since President Obama took office.

But the more expansive website long used by contractors is the Federal Procurement Database. According to allegations in a federal lawsuit filed by the American Small Business League, the agency has proposed removing a key requirement from the FPD so that companies would no longer be required to swear under oath that they qualify as small businesses.

Specifically, the small business advocacy group claims the SBA moved in March to eliminate the one spot in the long-standing FPD that companies must designate, under penalty of perjury that they are a small business.  Swain claims there are other places in the contracting process that require firms to make sworn statements in order to prevent fraud.

While there may be other places in the labyrinthine government filing process that requires such certification, the Federal Procurement Database is the place where the public and watchdog groups can monitor the accuracy of corporate contractors and the SBA's oversight efforts.

Public Portal

The two sides have been in settlement talks for months without resolution.

"There is no reason they [SBA] should keep destroying evidence that could be used to prosecute these firms for fraud," ASBL founder Lloyd Chapman said in an interview.

Chapman (ASBL Photo)

Chapman asked a US District Judge William Alsup to block the changes. In March, the judge let Chapman question SBA employees about the reason for proposal. 

Alsup speculated in court that there may well be large firms "on K Street in Washington," a reference to the address of many lobbying firms, that pressured the government to eliminate the document trail Chapman wants to preserve.

"I think the judge was right," said Chapman, who claims the SBA wants to eliminate the very coding  "we need to sue [companies] for fraud."

The 23% Target
Thirty years ago Congress mandated that 23 percent of its prime contract dollars go to small business. But the goal has also created a perverse incentive for the SBA and other federal agencies to ignore large corporations that claim small business status because big awards allow the agencies to get closer to meeting the target.

When small company status is attributed to a large corporation in a contract, the SBA's traditional response to the problem has been to retroactively reduce the count toward the 23 percent tally - but not to redirect the contract to a true small business. This deprives small businesses of  winning their fare share of government business, according to Chapman.

The SBA recently reported that small businesses won nearly $97 billion in federal prime contracts last year, just shy of the 23 percent goal. But ASBL claims that figure is inflated by dollars that have wrongly gone to big corporations claiming small business status.  

"My guess is that legitimate small businesses are getting less than $50 billion a year, just a few percent of the goal," said Chapman.

ASBL's review of the top 100 recipients of federal small business contracts for fiscal year 2009 showed 61 were actually large businesses, many are household names like Lockheed Martin, Boeing, Raytheon, British Aerospace and Bechtel Corp. 

Undetected Errors
As recently as March, the GAO reported that its own investigation of 14 cases, found $325 million in contracts went to firms whose presidents lied about income, ethnicity or underreported assets to the SBA. Yet in some cases the SBA did not detect the falsehoods and certified the firms as small businesses, according to the GAO.

To be sure, some of the designations of small business status stem from outdated information, such as when a large company buys a small one, or when a small business outgrows the designation.  But other cases appear to be intentional.  As many as 60 of the top 100 small business contract recipients were large firms, some even in the Fortune 500, according to the ASBL, which currently has six suits pending in federal court in San Francisco.

Although an interagency task force on federal contracting opportunities for small business issued 13 recommendations to improve transparency in deals with small businesses, the loss of contracts to big business competitors is unlikely to turn around soon.

Now the SBA faces a merger issue of its own. On November 11, the President's special commission on debt reduction included a plan to eliminate the SBA by merging its operations into the Department of Commerce for an estimated $1 billion savings over the next three years.

Next in Part 2:  One small company's challenge

Source: http://redwoodage.com/content/view/233424/49

Business advocates are charging the Defense Department with redlining the government contracting business to the extent that the 2011 Defense Authorization bill would allow DOD officials to secretly blacklist contractors and bar them from doing any business with the federal government.

In particular, they say this “blatant power grab” by agency heads could end up significantly harming small-business contracting because it could lead to the concentration of contracting dollars in the hands of just a small number of big companies.

The American Small Business League (ASBL) recently went public with its concerns in a dispatch from Communications Director Chris Gunn in The Exception magazine.

“Small-business advocates are concerned that DOD’s determination will be shared with each agency where the company competes as a prime contractor or subcontractor,” Gunn writes. “This could lead to the broad-based exclusion of contractors from federal contracting programs without due process.”

That could be a sensitive issue with the new Congress. Government agencies have specific small-business set-aside targets, but small-business advocates consistently complain that agencies are not doing enough to meet those goals. And last year, things came to a head in Congress over charges of fraud in the Small Business Administration’s set-aside programs, which allegedly cost small companies some $100 million worth of business.

According to Gunn, ASBL estimates that more than $100 billion in federal small-business contracts are diverted away from such companies every year, with many large companies — such as Boeing, Lockheed Martin and Northrop Grumman — receiving the contracts instead.

ASBL has legs when it comes to making its concerns known and paid attention to. Earlier in the year, it sued the government for muddling its small-business contracting data, thereby reducing the transparency of government contracting. Groups had used that data to uncover fraud in the past, ASBL said.

And in November, the group sued the Homeland Security Department for refusing to release subcontracting reports on contracts it had awarded to Boeing.

A big part of the beef ASBL and others have with the new Defense bill is that they say it will allow DOD to blacklist companies without notifying those companies. And it protects the blacklist from disclosure requirements that would be part of a Freedom of Information Act request, a protest to the Government Accountability Office or action in federal court.

Source: http://washingtontechnology.com/blogs/quick-study/2010/12/brian-robinson-small-business-dod-blacklisting.aspx